Investing in Options: A Beginner’s Guide (Part 1)

Options are a versatile financial instrument for investors. They are also complex and somewhat risky. It's important that you understand the basics of option trading strategy before diving in.

What is an option?

Options are contracts that give you the right to buy or sell an asset at a fixed price (strike price) for a specific period. That period could be as short as a day or as long as a couple of years, depending on the option. The seller of the option contract is obligated to take the opposite side of the trade if and when the owner exercises the right to buy or sell the underlying asset.

Why trade options?

If you'd like to expand your repertoire of trading strategies and potentially profit from market trends, options can come in handy. With options, it's possible to profit whether stocks are going up, down, or sideways. You can use options to cut your losses, protect your gains, and control large chunks of stock with a relatively small cash outlay.

This article will give you a brief overview of core options concepts and define some key terminology. Covering the basics now will make everything a lot easier to understand as you delve deeper into the fascinating world of options.

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Options involve risk and are not suitable for all investors. Review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose more than the entire amount invested in a relatively short period of time.

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